For homeowners interested in making some property improvements without tapping into their savings or investment accounts, the two main options are to either take out a Home Equity Line of Credit (HELOC), or do a cash-out refinance.

A Home Equity Loan is similar to the line of credit, except there is a lump sum given to the borrower at the time of funding and the payment terms are generally fixed.

Both a Line and Loan would hold a subordinate position to the first loan on title, and are typically referred to as a “Second Mortgage.”

Since second mortgages are paid after the first lien holder in the case of default foreclosure or short sale, interest rates are higher in order to justify the risk.

Fees, Interest Rate, and Timeline are the three main factors to consider which option to choose in order to pull equity out of a property.

However, there is a way to structure a closing cost and interest rate scenario that will decrease the amount of fees, or how a borrower pays them.

Basically, the costs to produce the new mortgage are either financed into the loan amount, or covered by the lender in exchange for a slightly higher than market interest rate.

Deciding on the best option involves weighing the difference in cost up-front vs the increased monthly payment over a set period of time.

Q: How long do I have to wait to refinance after a purchase transaction?

The rule-of-thumb is 8-12 months, but there may be exceptions. It’s important to check with your lender at the time of initial application to make sure there aren’t any short-term penalties for refinancing within the first year.

Another thing to consider is the cost of refinancing. If you’re watching the market and may want to lock in a lower rate in the near future, it may be more cost effective to pay a discount point for a lower rate vs paying for a full refinance a few months later.

Q: I heard that I should only refinance if I drop 1% on my mortgage, is that true?

Some people say ½%, 1% to never. Every mortgage is different.

Q: Why can’t I just compare my current payment to the proposed payment and figure out my net benefit?

You could just compare just the two payments if you wanted to find out your cash flow savings, but the current and proposed loans may have two different amortizations. Let’s say you have a 15 year mortgage currently and you are comparing to a 30 year mortgage.

If everything else is the same (interest rate, loan amount, etc) except for the amortization your interest savings per month would be $0 but, you are going to show a cash flow savings because of the longer amortization.

Q: Do I have to refinance with my current mortgage company?

No, you may choose any company you wish to refinance your mortgage since the new loan will replace the old mortgage.

Q: Is it easier to refinance with my current mortgage company?

Sometimes your current company can reduce the documentation that is required, but this usually comes at increased costs and interest rate. Make sure that you check to make sure you’re getting the best deal.

Q: Will I automatically qualify?

No, you will have to qualify for your new refinance. However certain programs will allow for reduced documentation like the FHA to FHA Streamline.

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Robert Salotto

First Financial Lending is building a strong reputation as an outstanding Mortgage Broker and Lending Firm serving the lending needs of real estate professionals, builders, and individual homebuyers throughout the States of New Jersey and Pennsylvania. We are a full service Mortgage Broker and Lending Firm, with an experienced staff offering expertise in every area of mortgage lending, from purchasing to refinancing to construction loans.